Nearly $1.5 trillion in commercial mortgages are coming due over the next three years, according to data provider Trepp. Many of the commercial landlords on the hook for the loans are vulnerable to default in part because of the way their loans are structured.
Unlike most home loans, which get paid down each year, many commercial mortgages are known as interest-only loans. Borrowers make only interest payments during the life of the loan, with the entire principal due at the end.
Interest-only loans as a share of new commercial mortgage-backed securities issuance increased to 88% in 2021, up from 51% in 2013, according to Trepp.
Typically, owners pay off this debt by getting a new loan or selling the building. Now, steeper borrowing costs and lenders' growing reluctance to refinance these loans are raising the likelihood that many of them won't be paid back.